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Our take on opposite Macro/CTA views on bonds

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Systematic Global Macro and CTAs are often associated with each other because many strategies are multi-asset, global, and have a top-down investment process.

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Our Take On Opposite Macro/CTA Views On Bonds

Systematic Global Macro and CTAs are often associated with each other because many strategies are multi-asset, global, and have a top-down investment process. Both tend to be pooled together in benchmark indices. They are also appreciated for their diversification ability and their strong track records during rough periods when risk assets undergo sharp and protracted drawdowns. Yet, we’re making the argument that the two strategies are quite different.

Performances between Systematic Macro and CTA strategies were comparable over the past 18 months (+2-3%) according to Lyxor UCITS Peer Groups. Concurrently, the 6-month correlation of daily returns between CTA and Systematic Macro strategies is as high at 0.7 at present (0.3 between CTAs and Discretionary Global Macro). From this perspective, they have commonalities. Yet, their volatility nonetheless stands in stark contrast. We estimate that CTA return volatility was 6% (annualized) over the past twelve months, while Systematic Macro volatility was much lower, at 3.6%. 

In terms of positioning, there are also substantial differences between the two. The strong trend in bond prices observed since September 2018 has led CTAs to accumulate elevated net long positions on fixed income, especially in Europe. In turn, Systematic Macro Strategies—driven by fundamental inputs—expect a rise in bond yields and have accumulated net short positions on bonds. Later in the year, as major central banks are set to ease monetary policy, their action could very well translate into a steepening of yield curves and a rise in bond yields if it succeeds in boosting growth and inflation expectations. Global Macro strategies are positioned to benefit from this outcome, while CTAs would suffer from such a development. 

Our preference for CTAs vs. Systematic Global Macro was rewarding in Q2. Going forward, we maintain this preference, but we are concerned about potential trend reversals in fixed income. Bond yields have reached very low levels, particularly in Europe. The bleak macro picture does not suggest they should rise materially and sustainably in the short to medium term. But even a modest repricing in bond yields would hurt CTAs, due to their sizeable long exposures. As such, we maintain the preference for CTAs but argue that recent performance should serve as an incentive to take some profits and rebalance progressively towards Systematic Macro strategies to protect portfolios against a potential rise in bond yields.